Unplanned spending threaten fiscal fitness

By Shebo Nalishebo

The fiscal consolidation measures put in place in the 2018 Budget are likely to pay dividends if the Government sticks to the set plans. Subsidy cuts on agriculture, fuel and electricity are some of the many factors that will help bring the fiscal deficit on a commitment basis to around 8.2 percent of GDP in 2018 from 9.3 percent of GDP in 2017.

However, unplanned spending and misalignment of the Budget threaten the path to fiscal fitness.

The 2018 Budget tries to balance between meeting development aspirations and ensuring short- to medium-term health of public finances. To balance these objectives, Government has proposed to increase spending by a smaller proportion in 2018 than in 2017. That is, in 2018, spending will be increased by only K7.2 billion compared to the K11.4 billion increase in 2017. This is partly on account of reduced inflows of loans from cooperating partners meant for specific programmes, reduction in allocation to the Farmer Input Support Programme, moving to cost reflective electricity tariffs and reduction in fuel subsidies and imports. Similarly, spending on interest payments on debt is expected to increase by only K2.8 billion compared to the K4.3 billion increase in 2017. As a result of this relatively lower spending, the total Budget is set to decline, as a share of GDP, to 25.9 percent in 2018 from 27.7 percent in 2017.

On the revenue side, Government proposes a wide range of revenue measures to meet the expenditure demands. These measures are expected to bring in K6.1 billion more in domestic revenues in 2018 than in 2017, pushing total domestic revenue to K49.1 billion compared to K42.9 billion in 2017. Despite domestic revenue falling to 17.7 percent of GDP in 2018 from 18.4 percent of GDP in 2017, these measures will result in the fiscal deficit on a commitment basis reducing by 1.1 percent of GDP. It is clear that the proposed Budget sets the path towards achieving fiscal consolidation, which is a policy undertaken by the Government to reduce the fiscal deficit and debt accumulation.

In order to stay on the path to fiscal fitness, the Minister of Finance will have to ensure that the macroeconomic stability that has been achieved in the last few months is maintained and, building on that, stronger growth is achieved so that domestic revenues are enhanced. To achieve robust growth, money will have to be spent in line with development aspirations and growth areas espoused in the 7NDP. The savings made from reduced subsidies and other unproductive expenditures should therefore be reallocated to the Economic Affairs function which will play a major role in achieving a diversified economy as well as the social sectors.

Unplanned spending remains an issue of great concern. In the last five years, deficits have mainly been propelled by the rapid rise in recurrent expenditures. In 2013, there was a very large expansion in the fiscal deficit which was mostly driven by a swelling of the public sector wage bill. There was also a surge in interest payments on debt following the issuing of three Eurobonds during 2012-2015 collectively amounting to US$3 billion (with the 2014 and 2015 Eurobonds issued without appraisals and clearly spelt-out utilisation plans). Further, the electricity shortages that ensued in 2015 led to a surge in the electricity import bill and subsidies.

With fiscal deficits in excess of 5 percent of GDP per year during the last few years, the country has been adding at least US$1 billion annually to the stock of debt. As a result, public debt has accumulated to 47 percent of GDP (or over 52 percent if you add domestic arrears) and interest payments on debt will account for 20 percent of total expenditure in 2018, surpassing the total spending on education and social protection.

In order to curb these unanticipated spending pressures and excesses, the Minister has initiated some legal, system and institutional reforms. He announced the long-awaited medium term Debt Management Strategy, which outlines measures to reduce the rate of debt accumulation and ensure that the Government’s financing needs and payment obligations are met at the lowest possible cost. Other measures include the long overdue enacting of the Planning and Budgeting Bill, revisions of the Public Finance Act, the Public Procurement Act and the Loans and Guarantees Act as well as the full rolling out of the Integrated Financial Management Information Systems [IFMIS] and the Treasury Single Account. These measures will enhance fiscal accountability, transparency and improve overall fiscal governance.

Another risk to fiscal fitness is related to misalignments between the 2018 Budget and the 2018-2020 Medium Term Expenditure Framework (MTEF). The spending plans in the MTEF which are supposed to serve as a hard budget constraint on the annual Budget have already been exceeded – the proposed Budget for 2018, at K71.7 billion, is nominally 9.5 percent larger than the MTEF projected Budget for 2018 (K65.4 billion) and is also higher than the 2019 MTEF projected Budget of K69.1 billion.

In trying to achieve fiscal fitness, it is important that no one is left behind. However, the growing debt and increased interest payments on the debt has resulted in crowding out non-interest expenditure. The casualties have been the Public Service Pensions Fund and the Education sector whose expenditure shares in the total Budget have reduced. Such anti-poor spending shifts raise serious questions about how well and how far Government can really carry everyone along.